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Editorial: The Future of iWallet + Digital Payments on iOS

Technologists have claimed for years that cell phones will eventually replace our wallets, and they’re probably correct. Even before the iPhone’s 2007 launch, Japanese phones were paying for soft drinks and subway rides, while more sophisticated credit card alternatives were in early testing stages. Yet for the most part, we’re not much closer to a wallet-less planet than we were five years ago. Today, the iPhone offers a handful of disparate stored value, payment, and ID card alternatives, but there’s no uniform payment method, and certainly no way for most people to stop carrying cash or most of their plastic cards. Apple is in a unique position to disrupt the budding digital wallet industry with a streamlined product that works either on the hundreds of millions of iPhones and iPod touches it’s sold, or on the next hundreds of millions it’s going to sell. The iOS 6 application Passbook is Apple’s first official step towards a wallet-free future, but it’s still only a start.

With Passbook’s public release just around the corner, we wanted to consider where things stand now with iOS digital wallet and payments apps, and where they’re likely to go in the foreseeable future. We’d also like to hear from you—would you like to see your iPhone evolve into a wallet, or not?

Third-Party Initiatives

Because there’s no single system for making payments from an iPhone, Apple’s third-party developers have had to develop their own solutions. Most have set up systems specifically to store value and make payments at their own businesses—Starbucks is a noteworthy example—while some, including Square, have established digital payment frameworks for use by others. Following their lead, Apple even added real world purchasing options into its own Apple Store app. Each of these solutions is worth understanding.

Starbucks’ current app has multiple functions, but one of its premier features is the Starbucks Card. Officially launched in January 2011, it gives iOS users the ability to store value transferred from a linked credit card, and make purchases directly from the device. Starbucks locations are outfitted with special scanners that read the digital barcode on the iPhone, iPod touch, or iPad screen, then automatically charge the account. Not only does this allow users to buy drinks and snacks without taking out their wallets, but it also enables the company to keep track of purchases as part of its loyalty program.

While Starbucks’ app works very well as an alternative to carrying a plastic card, it does have a few limitations: the solution is specific to one merchant, dependent upon another piece of plastic—the credit card used to refill the card—and requires a new scanning system that would likely be costly for most merchants. Apple and Starbucks have historically had a strong relationship, so it’s possible that the iPhone maker quietly helped to get the system in place, minimizing expenses. It’s also worth noting that because Starbucks does its own credit card processing rather than using Apple’s in-app purchasing system, it gets to keep almost the entire transaction’s value rather than forking over 30% or some other fraction of sales to Apple. This “do it yourself” approach has worked well for large vendors so far.

Pay with Square—formerly known as Card Case—is perhaps the most prevalent payment system on iOS right now, serving as the flip side of Square Card Reader, an app that optionally works with a hardware swiper to accept payments. Square’s newer solution is designed to make it easy for customers to pay merchants who are using Square Register software. Once you’ve linked a credit card to your Square account, you simply walk into a participating store, manually open up your tab or have it automatically open based on location, and tell the cashier your name. He or she taps on your icon within Square Register, and your card is automatically charged—your iPhone never has to leave your pocket. The biggest drawback of this system is it requires buy-in from both customers and merchants; it only works when (a) a company is committed to using an iPad as its point of sale solution, (b) selects Square to power it, and (c) has customers who are familiar with and want to use the payment option. Getting all these pieces in play isn’t an easy feat.

Then there’s the Apple Store app and its EasyPay function. As is its wont, Apple has bent the rules a little bit to make things easy for its customers. While Starbucks and Square both rely on users to supply a separate credit card for payments, this one links directly to your already-supplied Apple ID/iTunes credit card, charging your account directly for purchases. Instead of having to deal with an often-overburdened Specialist, the customer can just launch the app, scan the barcode on any available product, enter the Apple ID password, and walk out with a purchased item. Apple’s system won’t appeal to every retailer for a number of reasons, including the massive potential for fraud and theft if the store isn’t being patrolled. However, Apple seems happy with the program in its stores; salespeople heavily promote it in conversations with customers, and even on their name badges. Just as iTunes did with digital downloads, EasyPay is slowly but surely changing the way people look at making bricks-and-mortar purchases.

Passbook: The First Step Towards Apple’s iWallet?

Announced as a banner feature of iOS 6, Passbook isn’t yet an attempt to replace the entire contents of your wallet, but rather a step towards getting rid of paper tickets, coupons, store-specific payment cards, and possibly more. During Apple’s WWDC keynote, it was presented as “The simplest way to get all your passes in one place,” alongside a demonstration of digital boarding passes, store cards, movie tickets, coupons, and express check-in cards. Each of these concepts existed prior to Passbook, either as a screen-scannable or home-printed alternative, but Passbook unifies them on your iOS device and makes them easy to access. You mightn’t even have to open Passbook manually: with the right location awareness programmed in, Passbook automatically displays the card you need when you arrive at a specific destination. Instead of having to launch the Starbucks app to pay for a latte, for example, Passbook can display the same scannable barcode as you would in the standalone title. You could also call up your boarding pass for a United flight or a coupon for Target.

Like prior third-party solutions, Passbook has limitations. As of today, there’s no way to purchase tickets or add to balances directly from within Passbook; the app simply displays what’s already been created in other apps or web sites. It doesn’t link directly to debit or credit cards. And for the time being, it isn’t communicating in any sophisticated wireless manner with merchants’ computers: the iOS device’s screen has to be scanned or read. A recent Wall Street Journal article suggests that this is a deliberate move on Apple’s part—according to inside sources, Apple engineers have been aggressively pursuing mobile payment options, but decided to start slow with this iOS 6 feature. There’s little doubt that Passbook will be quite useful, and hopefully it will spur merchants to upgrade their systems to better integrate with iPhones.

Apple can choose to take several different paths with Passbook, but it’s clear the app is the company’s Trojan horse as it moves towards offering a full mobile payment system. At this point it’s trying to get iPhone users used to whipping out their devices when they get to a cash register, to develop the paradigm before expanding it to process payments directly. This could change in the future, and if so, Apple would certainly seek a way to monetize it. Perhaps it’ll allow customers to reload their Starbucks Cards or buy movie tickets directly from Passbook and take a cut of the transaction—a small cut, if it wants merchants to participate. While third-party apps are already in place to do these transactions on the phone without extra fees at either end, Apple would pitch its unified solution as easier for the user, and would mint cash as a middleman on the transactions. At almost every keynote event, the company has flaunted the growing millions of accounts it has with credit cards attached—a clear message that access to that money is coming in some way besides its own digital stores.

The Future

Going forward, Apple could choose to handle and process payments in a number of ways. It could adopt the Starbucks or Square model, or a modified version of one of them. These solutions will likely be challenging, as they currently require custom hardware, and are certainly not assured adoption by companies. Without a wide swath of merchants ready to jump on board, a new Apple-developed service would be limited in appeal, and without widespread adoption as a foregone conclusion, the company would likely hold off. It’s also possible Apple could acquire Square and its existing merchant network, although one could argue that this would have happened already if Apple had any such plans.

Another possibility is that Apple would make deals with American Express, Discover, MasterCard, and Visa to allow each existing popular credit card to live on your phone. This could come in conjunction with the addition of a near field communication (NFC) chip within the iPhone itself. Already integrated into many credit and debit cards, NFC technology allows for “tap to pay” compatibility with systems that’ve already been adopted by many retailers. Rather than swiping a card, the user simply has to touch the NFC device to a reader, and the payment is processed. Google has already attempted to do something similar with Google Wallet, albeit to a very limited degree. Many users would find NFC with traditional credit card support to be an ideal solution. You could walk into any store, tap your iPhone at the register, and walk out with your purchase and a paper/digital receipt. Going forward, it wouldn’t be surprising to see Apple link its users’ Apple IDs into this kind of payment system with a virtual Apple Card, circumventing traditional credit card issuers. In fact, this almost seems like a foregone conclusion given the trajectory the company has been on for the past several years.

We know that Apple has invested in NFC technology by hiring experts in the field as far back as two years ago, and rumors continue to suggest it will make it into the next iPhone—even though previous rumors of the same thing haven’t panned out. If NFC hardware’s there, it’s possible a software solution will accompany it as a keynote surprise; after all, Apple now tends to hold back some of its banner iOS features from developer betas so that it can launch them with fanfare alongside new devices—Siri is an example.

If something like this is in place, in the near- or long-term future, the big question is how Apple will take its cut? In the iTunes Store, App Store, and iBookstore, Apple takes 30% of every digital media sale it handles, period. The logic is it’s hosting the content as well as processing the payments. Most developers have come to accept the charge, even if they view it as unreasonably high. When it comes to processing other transactions, however, there’s no way merchants would accept such a high rate. They’re used to payment processing fees that are closer to 3%. Apple may be able to charge a premium over these rates, but not a big one.

There’s one other thing that an Apple-developed wallet could handle, and that’s storage of non-payment personal information such as identification cards—driver’s licenses, Social Security cards, medical insurance cards, and dare we even think of an iPhone-based digital passport? Already handled partially by apps such as Agilebits’ 1Password, ID card storage integrated into iOS could become an even bigger deal, and would eliminate the need to carry a wallet for anything but paper currency.

While replicating key ID cards will require high-level government participation, the addition of NFC-based payments strikes us as an inevitability, and we think we’ll see it sooner rather than later. Unless it tries to build its own wireless payment system using Bluetooth Smart, Apple will be able to leverage existing NFC infrastructure—here the hundreds of thousands of tap to pay stations retailers already have in place—with a sleeker implementation of the technology. Google may have done it first, but Apple will present it in a thorough, simpler manner that makes it seem like it was the only one to ever have the idea. The big questions that remain are: how active will Apple be in the actual processing? Will your existing credit card just be another pass in Passbook, or will every iPhone-based payment go through the credit card tied to your Apple ID? And just how much of a cut will Apple take, possibly jacking up prices of real-world goods in the process?

We’ll likely have answers to those questions by this time next year, if not sooner. In the meanwhile, tell us what you’d like to see from an Apple iWallet, if anything at all.